The Risk Of Loss Of Investment Principal
Rises As Bankers Add Liquidity To Markets
by Richard Gorton, The Resourceful Bear Blog | September 19, 2008
PrintFinancial Market Report And Commentary For Thursday September 18, 2007
The stock market traded in a volatile manner in early trading; and rallied late in the day on word that the Bush Administration has a plan to rescue banks from debt.
The Euro, FXE, Has Risen From August 12th Through Today August 18, 2008
A number of factors have caused the Euro, FXE, to rise; these include:
1) it's part in the 'Armageddon Trade', that is the unwinding of the yen carry trade, and traders took profit, allowing it to rise.
2) investors took safe haven in gold as liquidity evaporated. The Euro, being the primary, commodity currency, in addition to the Australian Dollar, FXA, and the Canadian Dollar, FXC, was pulled up by investors buying gold.
3) interbank loan transactions are settled in Euros.
The Direction For All Wealth Except The Yen Is Down
The rise of the Euro is seen in the ActionForex chart article Markets Stabilized after Central Bank Actions, Dollar Still Weak where the EUR/USD rose to 1.4456.
Soon the EUR/JPY will be continuing to unwind, taking the Euro, FXE down from 143.31 ... FXE Daily ... and ... FXE Weekly
The Ted Spread Rose Higher From Yesterday
The Ted Spread is a metric of liquidity. The fact it blew sky high to 3.02 yesterday and rose today to 3.13, relates that money and cash has gone out of the financial system.
Jesse reported yesterday that the TED Spread Rises To New High For The Credit Crisis
My definition of the Ted Spread is an additional interest (above a 3-month US Treasury) that banks charge each other, to lend to each other.
Wikipedia Definition: "the TED spread is now calculated as the difference between the three month T-bill interest rate and three month LIBOR. The TED spread is a measure of liquidity and shows the degree to which banks are willing to lend money to one another."
Savings And Loans, Banks And Investment Bankers Are In The Process Of Dying With Shareholder Value Getting Wiped Out
Bill Jamieson of The Scotsman in report Darkest Day For Scottish Banking As The Bank Of Scotland Faces Its End reports: "For Scotland's oldest bank, it was the suddenness of its rout that stunned. That and the silence at the top. That and the invisibility of leadership. That and the short-selling frenzy that descended on HBOS shares yesterday, like vultures on a corpse.
My commentary is that even in buyouts, toxic debt remains un-liquidated; it is definitely written down, but remains.
The Liquidation Thesis holds forth two principles: One, irredeemable debt and unfunded retiree benefits, must be liquidated, that is done away with. Two, government services and payments as well as service sector jobs, of all types, being unsustainable, will be done away with as well.
The level two and level three debt at HBOS must be and will be liquidated, that is done away with.
Massive numbers of employees must be and will be discharged.
Peak Treasuries Was Achieved Yesterday September 17, 2008
Peak Treasuries occurred September 17, 2008 when the Treasuries ETF fell from 98.49. This is documented in today's charts:
TLT ... TLT closed at 97.05
$USB ... $USB closed at 121.81
BTTRX ... BTTRX closed at 60.76
Confirmation of Peak Treasuries comes from the Financial Ninja article Japan v2.0: GLOBAL Liquidity Trap CDS that relates that spreads on Treasuries rose to 30 basis points. Nine months ago, CDS on Treasuries were an oddity rather than an actively written contract, and the spread was 2 basis points.
Peak US Dollar Was Achieved September 11, 2008
Peak Dollar occurred on September 11, 2008 when the Dollar fell from 80.22.
The factor that turned the tide for gold higher and dollar lower, apparently is the inability of banks and investment bankers to obtain liquidity outside of Federal Reserve facilities such as TAF, TSLF and PDCF.
The US Dollar, $USD, rose to $80.22 on September 11, 2008 ... $USD
Today the $USD closed at 78 ... $USD
Investment Application
Gold, $GOLD, closed up at $852. The gold ETF, GLD, lost 3% to close at 82.80 and oil, USO, rose 2% to close at 79.17.
The overall market, VTI, rose 3% to close at 60.50.
The Russell 2000, IWM, which is moves dramatically with financial news, soared 6% to 71.80 which is the confluence of its 200 day and 50 day moving average.
For this week the Russell 2000 value shares, IWN, have risen 0.78%; while the growth shares have fallen 1.17%. Today's rally brought the IWN:IWO ratio back up to its 200 day moving average ... IWN:IWO
Those foreign markets which were heavily decimated by the Armageddon Trade, that is by the unwinding of the yen carry trade, rose sharply: the emerging markets, EEM, rose 8%; and China, FXI 16%.
Most financial organizations are dead, dead and dead. Take Washington Mutual, WM; It's a walking dead man as John Mauldin suggests in Safehaven.com article Dead Men Walking
To quote the Financial Ninja: "You can’t bring back the dead with a defibrillator. You can’t bring back dead banks with more liquidity."
A liquidity event, that is a liquidity meltdown, occurred yesterday September 17, 2008, -- liquidity evaporated from financial markets and money markets funds. This happened for a number of reasons, including a flight to safety in gold and short term government debt, as well as in settlement of credit default swaps; no wonder they were termed, by Warren Buffet as "financial weapons of mass destruction".
The Central Banks, while injecting liquidity, have stabilized flight from the financial markets, as well as flight from money market funds, have done nothing to relieve the Ted Spread, the best metric of liquidity, as it measures the premium charged for interbank lending, increased again today as presented below.
The liquidity crisis, although tempered, remains.
A liquidity vacuum still exists. Systemic risk still abides.
The world banker's actions have provided only an abeyance and not an abatement of a financial system breakdown where one may not be able to obtain full and immediate access to one's monies upon demand in a brokerage account or in a money market account or at a bank.
Jesse in article A Run on Money Market Deposits Takes Down Two More Funds relates that two more money market funds were closed due to "significant redemption pressure" provides evidence of the risk of loss of investment.
The forces that have been at work sucking up all available cash, money and liquidity out of the world's financial system, such as counterparty risk on derivatives, and purchasing of gold, and what will soon be selling of US Treasuries, are still at work.
The yield curve measured in ETFs and the yield curve measured in rates is steepening, and will continue to steepen; this is inflationary.
The shortest of US Treasuries, SHY, currently trading at 83.73 is overbought ... SHY Daily ... SHY Weekly
The interest rate on the 10 Year US Government Note, $TNX, is going to go up from 3.44% ... $TNX
And the interest rate on the 30 Year US Treasury Note, $TYX, even more so from 4.11%
The Direxion Bear Treasury Fund DXKSX is going to go up from 13.08 ... DXKSX
The report of a proposal that the Government is considering a RTC like facility is a pipe dream -- a ghost of times past, served up to stimulate the market higher. While a containment can be built to surround the debt, its toxicity can not be restrained; one day the acquired debt of banks must be, and will be liquidated.
The debt of illiquid banks should not be purchased and nationalized. As mentioned above, apparently the banks are unable to obtain capital in the market place, so the Federal Reserve is planning to become the "bank of banks", with capital obtained from the US taxpayers. This should not be done, as it is privatization of profit for bankers, and socialization of losses unto the public.
The level two assets and level three assets held by banks, investment bankers, and in real estate organizations, and state government retirement funds are irredeemable and terrific toxic.
Yesterday, the neoliberal Milton Friedman floating currency exchange regime met its Waterloo as gold broke out, as gold posted its biggest one day gain ever, as reported by Stevenson Jacobs of Associated Press, as gold rose to $850. It closed higher today at $852. The US Dollar closed yesterday at 78.19, and closed lower today at 78.
There will be no action on the part of the Federal Reserve to lower the interest rate before the next Federal Reserve meeting because the Saudi Government is massively long the US Dollar in the futures market, as it hopes to get the McCain-Palin team elected. The Fed will not act against their position.
The USD/JPY has entered an Elliott Wave 3 Down, and will now pull the value of the US Dollar lower in respect to gold.
Charts of gold showing today's close at $852 ... $GOLD Weekly ... and ... $GOLD Daily
Chart of the US Dollar showing today's close at $78 ... $USD Weekly
The Yahoo Finance five day ongoing chart of the USD/JPY relative to the EUR/JPY is helpful to understanding the interplay of gold and the currency trades.
While the financial markets were stabilized today; the investment demand for gold has arisen to conquer the International Banking Cartel, as is established in the value of gold, GLD, relative to world stocks, EFA, and also in gold, GLD, relative to US Stocks ... GLD:EFA ... and ... GLD:VTI
Soon, very soon, the markets are going to freeze up, that is, the Institution of Finance, Commerce, Trade, and Investment is going to have a massive coronary and stroke, which will be seen in Treasury Repo Failures, massive stock market sell-offs, and a run on cash at money market funds and banks, and falling US Treasury values.
The North American governments are going to enforce the emergency management provisions of the Security and Prosperity Partnership, the SPP, whereby state corporatism will arise to rule. And it will appoint stakeholders to oversee finance, commerce, investment and trade, as well as the factors of production; and civil security will be established though military presence under the command of NORTHCOM.
Gold, although, it broke out yesterday, August 17, 2008, very well may fall lower for a while when the Euro, FXE, falls lower: support levels for gold are at $800, $750, $690 and $650.
The risk of loss of capital, is great if wealth is held at brokerage firms, banks and in money market funds: it is a greater risk than the deflation risk in gold.
I suggest that one go to the safe haven of gold.
The principles of ultra safe investing must be applied. Specifically, for protection and preservation of capital, I recommend diversification of investment in gold in four locations: the GLD ETF directly through streetTRACKS Gold Trust, and not in a brokerage account; two BullionVault, three GoldMoney; and four a limited number of gold coins. This investing should be done gradually over a period of days, that is, one "dollar cost averages" the investment.
We Have Reached Peak Foolishness
Catrina Stewart, Matt Moore, Ellen Simon, Chris Rugaber, Deb Riechmann, Julie Hirschfeld Davis, Andrew Taylor, Marcy Gordon of the Associated Press report in late night September 18, 2008 article Wall Street Rallies On Hearing The Bush Administration Has Plan To Rescue Banks From Debt: "The stock market finally found reason to rally Thursday, September 18, 2008 and Congress promised quick action as the Bush administration prepared a plan to rescue banks from the bad debt at the heart of the worst crisis on Wall Street since the Great Depression.
Details of the plan were still being worked out, but Treasury Secretary Henry Paulson emerged from a nighttime meeting on Capitol Hill, to say he hoped to have a solution "aimed right at the heart of this problem."
There was no immediate word how much the rescue plan might cost."
My comment here is that the announcement of the plan is a distraction from the investment peril at hand: that being a great shortage of liquidity, where one can suffer loss of principal during a liquidity meltdown. I encourage a 'dollar cost average' purchase of gold.
Statement Of Investment Position And A Caveat
I have a position in SKF and I own a few gold coins. I am a blogger who presents the investment demand for gold and the Liquidation Thesis; before one makes any investment decision, one should always seek advice from a licensed investment professional.
Article Addendum
Another factor encouraging investment in gold is the SEC and UK government changing the rules of investing without warning. Jesse reports that on Sept. 19, 2008, that "the Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday".
The does not instill integrity of investing and doesn't strengthen my confidence. Rather it encourages me to seek the safe haven of gold.
Primary ETF Symbols Used In This Report
GLD, TLT, SHY, FXE
Copyright © 2008 Richard Gorton, The
Resourceful Bear Blog
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Short Bio My investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.
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Richard Gorton 360-756-5431 | Bellingham, WA USA | Email | Website
